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Net Revenue Retention: The North Star Metric for 2023

February 17, 2023
January 17, 2023
January 16, 2023
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25
min.

Recently, many SaaS companies have been told to focus on Customer Acquisition Cost (CAC) as the primary metric for success. While this is an important metric, it's not the only one. Net Revenue Retention (NRR) should be considered to be just as important, if not more so. NRR is a critical metric in determining a SaaS business's overall health and sustainability over time.

But why is NRR so important for 2023?

Companies need to understand that customer retention and growth are crucial for long-term success. Without focusing on NRR in 2023, companies are at risk of missing out on key opportunities for growth and failing to capitalize on their existing customer base. With increasing customer competition and the potential for an economic downturn in 2023, companies must focus on keeping current customers loyal and ensuring continuous revenue growth.

So how can companies best optimize their NRR in 2023?

That's what this blog post will explore - looking into why Net Revenue Retention should be made the North Star Metric across all departments - RevOps, Product, Customer Success, Sales, Marketing, and Finance - and how it can inform strategies that result in higher customer retention rates and greater long-term growth.

Are you ready to find out why Net Revenue Retention should be your top priority?

Let's get started!

What is Net Revenue Retention and How is it Calculated?

Before getting into the nitty-gritty details, we should first cover the basics. Namely, what is Net Revenue Retention?

Net Revenue Retention (NRR) is an important metric that measures how well a company is retaining its customers. Net Revenue Retention is often used interchangeably with Net Dollar Retention and, for all intents and purposes, has the same meaning.

When we reference Net Revenue Retention - as we do throughout the rest of this post - we are referring to it as a rate - i.e., Net Revenue Retention Rate (NRRR). A NRRR above 100% means that customer accounts are growing from one period to the next, while anything below 100 indicates that customer accounts are decreasing.

The formula for Net Revenue Retention Rate is:

(Revenue in current period - Churned Revenue) / Revenue in previous period

In other words, it's the percentage of revenue that a company retains from its existing customers over a given period of time, after accounting for lost revenue from customers who have churned (cancelled their subscription or stopped doing business with the company).

Expansion Revenue and NRR

One of the key concepts related to Net Revenue Retention is Expansion Revenue and we should take a moment to cover that as well. 

Expansion Revenue is defined as the increase in revenue from existing customers within a given period. Expansion Revenue is calculated by taking the difference between the current customer’s subscription price and their previous subscription price. 

This metric gives an indication of how well a company is able to grow its existing customer base, which can be critical for SaaS companies in an economic downturn. 

There are two types of Expansion Revenue: Upsell and Cross-sell

Upsell refers to increasing the customer’s subscription plan size or adding additional features or services. Cross-sell involves introducing new products or services that complement existing ones. 

Both methods can help increase a customer’s total spending with a given SaaS provider, which can play an important role in maintaining Net Revenue Retention during tough economic times. 

By focusing on Expansion Revenue, SaaS companies can ensure that their existing customers remain engaged and continue to derive value from their subscriptions. This allows them to maintain their Net Revenue Retention, even when other markets are struggling due to external factors such as an economic downturn.

Parative Revenue Expansion Offer

Why Net Revenue Retention should be the North Star for RevOps

As RevOps continues to become more important, particularly in the SaaS industry, Net Revenue Retention should be the North Star metric for the team to focus on.

RevOps' main goal is optimizing customer retention and growth. To achieve this, teams need to adopt a customer-first approach and implement processes that are designed to maximize customer lifetime value. This means focusing resources on customers with significant growth potential and who are likely to stay with the product longer.

Net Revenue Retention is an ideal metric for measuring success in this regard, as it considers the total impact of all activities related to customer retention and growth. This includes activities such as upselling, cross-selling, discounts, renewal incentives, and other acquisition strategies.

By closely monitoring net revenue retention over time, RevOps teams can identify areas of their process that may need improvement to serve their customers better and ensure maximum profitability.

More importantly, by keeping track of Net Revenue Retention metrics, RevOps teams can quickly identify patterns in customer behavior that could signal red flags or opportunities for optimization.

For example, if a team notices that customers who sign up for a certain plan are churning at a higher rate than expected or that certain promotions are leading to lower net revenue retention numbers than anticipated - they can take steps to address these issues before they lead to bigger problems down the line.

Net Revenue Retention should be at the top of mind for RevOps teams this year.

NRR allows RevOps teams to monitor customer behavior and adjust their strategy accordingly to maximize long-term profitability; and, with its ability to provide an accurate picture of customer success over time, Net Revenue Retention should be seen as the North Star metric for understanding how successful your efforts are in terms of customer retention and growth.

Why Net Revenue Retention should be the North Star for Product

Product teams are essential in helping to drive customer retention and growth. They create the products that customers use, which can have a major impact on a company's success. By leveraging Net Revenue Retention as the North Star metric, product teams can focus their efforts on improving customer lifetime value and increasing recurring revenue.

By tracking Net Revenue Retention metrics, product teams can ensure they create products that customers want and need. The focus should be on developing new features and ensuring existing features are optimized to increase customer satisfaction and engagement. Product teams should proactively look for opportunities to improve how customers interact with their products and monitor how product innovations affect customer retention.

Net Revenue Retention is also important for product teams because it helps them understand the impact of their decisions on the bottom line. By understanding how changes to their products affect customer retention, product teams can make better-informed decisions about what to develop or improve next. This ensures that all development efforts are focused on creating value for customers rather than just building more features for the sake of it.

Using Net Revenue Retention as a guiding principle is crucial for product teams in 2023 because it will help them prioritize development efforts that will impact customer retention and growth the most.

Additionally, it will enable them to identify areas that require improvement to increase recurring revenue and maximize lifetime value.

Finally, by optimizing existing products for higher net retention rates, product teams can meet their goals while contributing positively to a company’s overall financial health.

Why Net Revenue Retention should be the North Star for Customer Success

Customer Success (CS) is a key part of any SaaS business. It is the bridge between the product and the customer, ensuring that customers successfully use the product and get value out of it. CS plays an important role in customer retention and growth, as it helps to ensure that customers are happy with the service they receive and that their needs are being met.

As such, Net Revenue Retention should be the North Star for Customer Success teams in 2023.

Net Revenue Retention helps Customer Success teams prioritize customer relationships, focusing on those who bring in the most revenue. This ensures that resources are allocated effectively, maximizing customer lifetime value (LTV).

Additionally, Net Revenue Retention can be used to measure success regarding upsells and cross-sells, which can help drive revenue growth and optimize customer engagement strategies.

By tracking Net Revenue Retention, Customer Success teams can better anticipate customer needs, allowing them to proactively address any issues before they lead to churn. This can also help teams identify opportunities for expansion or cross-sell by understanding which customers have more potential for further investment from their existing relationship.

Focusing on Net Revenue Retention by Customer Success teams will help SaaS companies get ahead of economic downturns; by focusing on keeping customers engaged and happy rather than seeking new ones, businesses will have a better chance of retaining current customers during difficult times.

Additionally, this metric provides valuable insight into where improvements can be made in terms of features or services offered – helping SaaS businesses stay competitive in their market.

Net Revenue Retention should be at the forefront of any Customer Success team’s strategy for 2023. By understanding how this metric works and how it aligns with goals for customer retention and growth, businesses can ensure that they make decisions informed by data-driven insights - which will ultimately help them succeed in a challenging economic environment.

Why Net Revenue Retention should be the North Star for Sales

With the right sales team in place, companies can drive customer loyalty and increase revenue. Net Revenue Retention (NRR) provides a comprehensive picture of customer lifetime value and should be the North Star that guides sales teams in 2023.

NRR gives sales teams an understanding of how their activities have impacted the bottom line; it provides greater visibility into the effectiveness of their efforts.

For example, if NRR is high, it indicates that customers continue to pay for services after signing up and renew their contracts when they expire. Conversely, if NRR is low, it means that customers are not renewing or expanding their services.

Sales teams can use NRR to understand customer needs better and identify improvement areas to increase retention rates. They can also use NRR to measure progress towards targets such as increasing contract expansions or reducing churn.

Additionally, by monitoring NRR over time, sales teams can discover trends within client portfolios and adjust strategies accordingly.

Furthermore, through tracking NRR regularly, companies can ensure that sales efforts are aligned with other departments such as RevOps, Product Development, Customer Success, Marketing, and Finance.

By setting goals based on Net Revenue Retention metrics and involving all relevant departments in achieving those goals, companies can maximize customer retention and growth in 2023.

Why Net Revenue Retention should be the North Star for Marketing

Marketing teams are responsible for ensuring that current customers are well-informed about new product features, services, and pricing updates to decide whether to stay with the company.

It is also the responsibility of marketing to create campaigns that attract new customers and retain existing ones.

Net Revenue Retention aligns perfectly with these goals.

Marketers can measure how well their campaigns work by focusing on Net Revenue Retention and deciding how to adjust them accordingly. Increasing Net Revenue Retention means that more customers are likely to stay with the company for longer and generate more revenue for the company.

Additionally, by focusing on Net Revenue Retention, marketers can identify which customer segments are generating more revenue than others, so they can focus their time and energy on those areas specifically.

The benefits of focusing on Net Revenue Retention as a metric go beyond simply retention rates; it helps companies build better relationships with their customers by providing them with tailored content and offers that meet their needs and wants.

Additionally, investing in customer service initiatives (such as live chat support) will help increase customer satisfaction levels, resulting in higher retention rates.

Finally, when marketers have clear visibility into Net Revenue Retention metrics, they can make data-driven decisions when creating or adjusting new campaigns.

It's become increasingly vital for businesses to focus on Net Revenue Retention as a metric in 2023 due to the impact of inflation on the economy.

Investing in marketing initiatives focusing on increasing customer retention rates - such as creating tailored campaigns specifically targeting certain segments - can help companies increase their net revenue retention rate over time. By doing so, companies will be able to acquire more customers while retaining existing ones, enabling them to weather the uncertain waters that lay ahead.

Why Net Revenue Retention should be the North Star for Finance

As the economic pressure on businesses increases in 2023, the need for a strong Net Revenue Retention strategy also increases. For companies to maximize customer retention and growth, it’s important for finance teams to understand the importance of Net Revenue Retention and how it aligns with their goals.

Net Revenue Retention (NRR) is a key metric that can be used to measure the success of customer lifecycle management strategies. It measures the total amount of retained, contracted, and expanded revenue over a set period compared to the total amount of churned revenue. NRR also provides insights into how effective a company is at retaining existing customers and acquiring new ones.

By understanding NRR, finance teams can identify areas where their strategies are working or need improvement, giving them the opportunity to get ahead of potential issues while they’re still manageable.

The main goal of any business is to increase its overall profitability, which means that increasing customer retention rates is paramount. Net Revenue Retention allows finance teams to track their progress toward this goal by providing an accurate and up-to-date picture of total customer value over time. This helps Finance teams make informed decisions about investments in sales and marketing activities that will help drive more profitable outcomes for both the business and its customers.

In addition to tracking profitability, Net Revenue Retention allows finance teams to assess whether their current pricing models deliver enough value for customers and if any changes should be made accordingly.

For example, if NRR metrics reveal that customers are dropping from certain price plans more quickly than others, then changes may need to be made to ensure better value for money for those customers.

Net Revenue Retention should be considered an integral part of financial forecasting models used by Finance departments in 2023 because it provides an accurate picture of customer lifetime value (LTV). Measuring LTV accurately gives Finance teams the ability to make better-informed decisions on budget allocations and appropriate investments to maximize profitability while ensuring customers continue receiving sufficient value from their purchases.

By understanding their role in customer retention and growth through Net Revenue Retention metrics, Finance departments can take steps towards becoming proactive rather than reactive when it comes to managing customer lifecycles. This will enable companies to respond quickly when necessary while also ensuring they don’t miss out on any potential opportunities. The end result is increased profits which can be reinvested into further initiatives designed to improve customer loyalty leading to increased retention rates over time.

The Impact of Poor Retention and Growth

Poor retention and growth can have many consequences for a business. When customers are not retained or when growth is stagnant, it can result in a decrease in revenue, an increase in churn rate, a decrease in customer satisfaction, and a greater need for marketing and sales efforts to acquire new customers.

To understand the impact of poor retention and growth, it's important to ask questions such as: How has customer acquisition been impacted by poor retention and growth? What strategies can be implemented to address low customer satisfaction? What tactics could be used to reduce customer churn rate? Are there any areas of the customer lifecycle that need more attention?

The potential causes of poor retention and growth can vary greatly depending on the specific company. Common causes include lack of product-market fit, ineffective pricing strategy, inadequate customer onboarding process, poor customer service experience, inconsistent product roadmap, lack of innovation or feature updates, insufficient user education resources and training materials. Additionally, external factors like competition or changes in market conditions can also contribute to poor retention and growth.

It's important for businesses to identify the root cause of their poor retention and growth in order to effectively combat it. Proactive companies should invest time into evaluating their current offerings; testing different pricing strategies; creating more effective onboarding processes; providing better customer support experiences; building out innovative features; educating users through webinars or tutorial videos; understanding competitive landscape; tracking key metrics like monthly recurring revenue (MRR), annual recurring revenue (ARR), lifetime value (LTV), net promoter score (NPS) etc.; training employees on new tools or processes; keeping up with market trends etc. Doing all these things can help a business identify potential opportunities for improvement which will ultimately result in improved Net Revenue Retention.

Conclusion

2023 is likely to be rough for many SaaS companies.

As the economic climate becomes more uncertain, customer retention and growth becomes even more important for businesses to focus on. 

By making Net Revenue Retention the North Star metric for 2023, companies can ensure that all departments are working together to achieve this goal. This includes RevOps, Product Development, Customer Success, Sales, Marketing and Finance. 

With Parative's Revenue Scoring Engine, SaaS companies can gain a deeper understanding of their customer base and identify key revenue signals that indicate a customer's likelihood to churn or purchase more. By monitoring customer behavior, usage, intent, contract consumption, feedback, and market conditions, businesses can score each customer's outcome readiness in real-time, and automatically trigger workflows when scoring indicates an opportunity. This allows companies to proactively address potential causes of poor customer retention and growth, and take action to improve their bottom line.

In addition to providing valuable insights, Parative's Revenue Scoring Engine also streamlines customer data management by bringing together customer data from multiple sources and merging it into unified records. This allows businesses to easily segment customers and identify signals that predict revenue opportunities.

Implementation of the Revenue Scoring Engine is quick and easy, taking only 15-30 days, and includes both software and dedicated access to expert humans to help teams achieve their desired outcomes. Don't let poor customer retention and growth hold your company back, use Parative's Revenue Scoring Engine to take control of your revenue and drive growth.

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by
Mark Lerner

Head of Marketing @ Parative, the Customer Behavior Platform. SaaS enthusiast, B2B Marketing Specialist, Startup Survivalist. Dad x2.

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